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Berkshire Hathaway Relying Less On Insurance Units

Berkshire Hathaway experienced really good news this week during Warren Buffett’s birthday because the current investors are happy because they can celebrate the fact that they have one more year of leadership from the Oracle of Omaha. Unfortunately, this milestone also put into the mind of investors that there will be somebody else running the company very soon once Warren finally retires.

Berkshire Hathaway actually consists of more than 80 businesses at this point in time, and fortunately they are all moving along and doing very well. These businesses even posted $3 billion in profit during the past quarter. They current Class A stock of Berkshire Hathaway is worth over $127,000 per share, and it’s nearly 3 dollars away from breaking its 52-week high which it previously set in the early part of August. This means there are a lot of good things that the shareholders of Berkshire Hathaway should very well celebrate.

But Warren Buffett also turned 82 years old this past Thursday, and he is advancing in age and he also had prostate cancer treatment during the summer. So this obviously reminds us that he is not immortal and he will eventually resign from his post. The good thing right now is that Mr. Buffett said that his cancer is not life-threatening, and he also feels really good at the moment. So that is a definite positive sign.

The succession plan for Berkshire Hathaway is already in place, and Warren Buffett made sure to tell his investors that there is a person chosen to take the helm of Berkshire Hathaway, and there are also two backup candidates available as well. Warren Buffett chose not to tell anybody who the next CEO of Berkshire Hathaway is going to be. At this time, he is both the CEO and chairman of Berkshire.

It is also true that Mr. Buffett does not plan on stepping down from his post at anytime soon, because he enjoys the wheeling and dealing so much that he doesn’t want to give it up just yet. And that’s regardless of the fact that he hasn’t bought a large company like a Lubrizol for $9 billion in quite a while. It’s actually been over a year.

The main thing we need to be aware of is that the successor to Warren Buffett will inherit a very large conglomerate that only gets more complicated with each new business acquisition. Berkshire Hathaway does not rely too heavily on insurance companies any longer, and it is being recognized more and more for its manufacturing companies, utility companies and its railroad Burlington Northern Santa Fe.

“The insurance is increasingly more of an engine that runs in the background instead of the driver of the business,” stated Jeff Matthews, who is the author of “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett.”

Buffett was requested to do an interview for this story, but he chose not to respond.

Berkshire Hathaway released their second quarter earnings report earlier in August, and it clearly showed us that more than half of the profits from this company come from mundane businesses like BNSF Railroad, Lubrizol, and their electric utility company MidAmerican Energy. And let’s not forget about their tool companies and manufacturing businesses.

This type of business trend has been evolving and getting stronger, and this is particularly so since Warren Buffett bought Burlington Northern Santa Fe railroad during 2010, but it’s even more transparent at this point since he picked up Lubrizol about a year ago.

“Even in the best of operating environments, the insurance side of the business would never out-earn the non-insurance side ever again,” stated David Rolfe who is the CEO of Wedgewood Partners. Berkshire Hathaway is actually the firm’s second-biggest investment.

The way Berkshire Hathaway now mixes up its businesses actually makes this a more attractive offer for those investors who weren’t too fond of the world of reinsurance and insurance because it’s kind of complicated. But the overall nature of Berkshire Hathaway isn’t going to change according to analysts, regardless of where the profit of this business comes from.

Author and stockbroker Andy Kilpatrick said “He’s got diversity. Rather than just a stock company or an insurance company, it’s an operating company.”

Kilpatrick also stated that he does not believe the company’s nature changed at all since Berkshire Hathaway is known to add more acquisitions onto their existing business structure, and they really don’t make any effort at all to integrate them.

Kilpatrick, author of “Of Permanent Value: the Story of Warren Buffett,” also said that “It’s not a simple company. It’s a complicated company, but it’s a successful company.”

The insurance and reinsurance companies owned by Berkshire Hathaway, which obviously include Geico, are one of the main driving factors of the profits for this company and they still are. The insurance companies currently generate $71.1 billion in float, which Berkshire Hathaway is able to invest during the time between customers buying their policies and then filing claims.

It doesn’t matter how big the insurance companies are at Berkshire Hathaway, because they are always going to be one of the mainstays of this company since there is risk involved when their reinsurance division writes some of their big policies.

As an example, during one deal that took place during 2006, Berkshire Hathaway made an agreement to cover up to $13.9 billion of asbestos claims, and they received $7.12 billion for this deal. Also, Warren Buffett also insured derivative contracts which could potentially create multibillion-dollar losses if the pricing was wrong. Warren Buffett actually believes that both of these deals will eventually end up profitable.

According to Matthews, the insurance divisions are definitely the riskiest part of Berkshire Hathaway and their business, and the replacement of Warren Buffett clearly needs to understand insure if the company is going to thrive when he retires.

Matthews said “If you do a bad job at the railroad, your earnings might get hurt, but the railroad is not going away. If you do a bad job in insurance, your whole company can go away.”

The current plan of Berkshire Hathaway is to split Warren Buffett’s job in three different pieces once he retires. The CEO that they hire is going to run Berkshire Hathaway, but two people that Warren recently hired over the last few years are going to oversee the investments. Warren Buffett also wants his oldest son Howard to succeed him as the company’s chairman.

The one thing that this shift in the business of Berkshire Hathaway has brought about is that the earnings of the company are a lot less volatile now, and the results of operating companies like Iscar tools and Acme brick are going to drive these results into the future.

But we don’t know if this mix is going to dramatically change now that Warren Buffett has about $41 billion worth of cash on hand to make another large acquisition if he chooses to do so.

Kilpatrick said that “At any moment, he could buy some other insurance thing and that could look big again.”

Berkshire Hathaway has subsidiaries besides manufacturing and insurance, and they are in the areas of ice cream, jewelry companies, private jet companies, furniture businesses and clothing companies. The major investments of Berkshire Hathaway are Coca-Cola, Wells Fargo & Company and IBM.

Disclosure: This website is not owned or endorsed by Mr. Warren Buffett or Berkshire Hathaway. We are an independent organization dedicated to finance news & events about the world's greatest investor.